MiCA: Markets in Crypto Assets – How to Remain Compliant

However, understanding how to remain compliant can be a complex undertaking.

Read more on how to stay compliant in our latest MiCA blog & discover how KYAX can help you stay out of trouble with a MiCA regulatory reporting tool 🌍🔐

#KYAX #KYAXchats #MiCA #ESMA #Regulatoryreporting

History 

The beginnings of a crypto regulatory framework within the EU(European Union) began in 2017. At that time, the rising popularity of cryptocurrencies like Bitcoin caught the attention of regulators across Europe.

This led to the adoption of the 5th Anti-Money Laundering Directive (AMLD5) in 2018, which brought Crypto-Asset Service Providers (CASPs) under the EU’s AML/CFT laws for the first time. This directive required CASPs to follow the same rules as traditional financial entities for money laundering rules, including customer identification, verification of identity, transaction monitoring, and reporting of suspicious activities.

Nevertheless, many crypto assets and service providers remained outside the regulatory framework, leaving significant gaps that exposed consumers and investors to considerable risks.

Additionally, some EU member states implemented their own crypto regulations, which were not aligned with existing EU laws. This resulted in regulatory fragmentation, creating uneven competition and complicating scaling efforts for CASPs, whilst enabling regulatory arbitrage.

Consequently, the European Commission’s policy body ESMA started developing harmonized regulations known as MiCA, which would be applicable across the entire EU. The first draft of MiCA was completed in 2020. Since then, MiCA has undergone several revisions to encompass all types of crypto assets and address potential issues that may arise.

Key Objectives of MiCA

MiCA primarily seeks to regulate crypto-assets and related services within the EU. Given the uncertainties in the crypto-asset market, the regulation overarching aim is to protect investors and prevent the misuse of crypto-assets whilst promoting financial stability and innovation.

MiCA creates a unified regulatory framework across the EU and establishes a singular EU licensing regime, which eliminates the need for national laws and offers a clear legal structure for crypto-assets but places a significant uplift on crypto company compliance to build the systems required to provide the repeatable data reporting required.

MiCA Entities Application

 The MiCA regulation applies to:

• Entities offering specific crypto-assets that do not qualify as ‘financial instruments’ under current EU laws. These entities need a licence and can avail the benefits of an EU passport — for instance, cryptocurrency exchanges dealing in cryptocurrencies and tokens
• Crypto Asset Service Providers (CASPs)*, which need to be authorised by a National Competent Authority regardless of whether the crypto-asset is issued under MiCA or otherwise, and can also avail the benefits of an EU passport
• Generally, most business operations related to crypto-assets within the EU are subject to the MiCA regulation. Even non-EU crypto-asset companies conducting business for EU clients must comply with the regulation

*Definition of CASPs: 

CASPs are legal entities or businesses that professionally offer one or more crypto-asset services to clients. These services and activities include:

• Custody and administration of crypto-assets on behalf of clients.

• Operation of trading platforms for crypto-assets.

• Exchange of crypto-assets for funds or other crypto-assets.

• Execution of orders for crypto-assets on behalf of clients.

• Placement of crypto-assets.

• Reception and transmission of orders for crypto-assets on behalf of clients.

• Providing advice and portfolio management on crypto-assets.

• Offering transfer services for crypto-assets on behalf of clients.

MiCA Product Application

 MiCA identifies three types of crypto-assets:

• Asset-Referenced Tokens (ARTs/Stablecoins): These are crypto-assets that stabilise their value by linking to other assets or a basket of assets.
• E-Money Tokens (EMTs): These tokens maintain their value in relation to a single official currency.
• Other Crypto-Assets: This category includes utility tokens, which are intended solely to provide access to a good or service supplied by the issuer.

Although the term ‘stablecoin’ is not used in MiCA, both ARTs and EMTs are forms of stablecoins and can be deemed ‘significant’ by the European Banking Authority (EBA) based on certain criteria. More stringent regulatory requirements apply to significant ARTs and EMTs such as capital requirements.

MiCA does not extend to crypto-assets that are unique and not interchangeable with other crypto-assets.

MICA Key Requirements:

Crypto Asset Service Providers (CASP):

• • Prudential requirements: CASPs must be authorised in the EU and are required to act honestly, fairly, and prioritize their clients’ interests.
  • Governance requirements: CASP senior executives must be trustworthy, adequately knowledgeable and competent to perform their duties, and they must institute robust policies and procedures to ensure MiCA compliance.
  • Handling conflicts of interest and complaints: CASPs are required to have a procedure for managing client complaints and an effective policy for identifying and disclosing conflicts of interest.
  • Capital requirements and secure measures: CASPs must abide by the minimum capital requirements outlined in MiCA and protect their clients’ ownership rights of crypto-assets. Regulators will expect systems that can provide proof that these measures are enforced to remain in compliance.
  • Environmental requirements: CASPs are obligated to publicly share information on their website about the environmental impact of the crypto-assets they service.
  • Significant CASPs: CASPs that are considered ‘significant’ will face heightened scrutiny and supervision from their National Competent Authority (NCA). MiCA defines a CASP as ‘significant’ if it has at least 15m active users, on average, in a calendar year within the EU.

• Reporting Requirements: 

• • Post trade transparency, and transaction reporting.
  • Record-keeping and crypto-asset white paper reporting.
  • Order book record-keeping report.
  • STOR (suspicious transaction order reporting).

Issuers of ARTs and EMTs:

• Authorisation requirement for ARTs: ART issuers require authorisation from their NCA before offering ARTs, including the publication of a white paper.
• Authorisation requirement for EMTs: EMTs can only be issued by credit institutions or e-money institutions under the E-Money Directive (2009/110/EC) and must also comply with the requirement to publish a white paper.
• Reserve of assets**: ART issuers are subject to requirements relating to the assets held in reserve and must at all times maintain a reserve of assets, ensuring the reserve of assets is operationally segregated from the issuer’s estate and from the reserve of assets of any other tokens. Proof of these reserves and segregation on an on-going basis will be key to remaining authorised.
• Assets custody: ART issuers must establish custody policies and procedures and can be entrusted to credit institutions, CASPs or investment firms (regulated under MiFID II).
• Permanent redemption right: ART issuers must establish a policy setting out the right of ART holders to redeem against the ART issuer or reserve assets at any time.
• Capital requirements: ART issuers are required to hold capital that is the higher of €350,000, 25% of fixed overheads of the preceding year or 2% of the average amount of reserve assets.
• Recovery plan: ART and EMT issuers need to comply with recovery plan requirements to provide measures for any issues related to the reserve of assets.
• Significant issuers: issuers of ‘significant’ ARTs and EMTs are subject to higher capital interoperability requirements. They must also establish a liquidity management policy.
• Market abuse regime: firms must implement systems and procedures for the prevention and detection of market abuse, including personal account dealing and inside information controls.
• Reporting requirements: ART issues must comply with new reporting requirements such as
  • Quarterly report to the NCA for ARTs with an issued value higher than €100m. 
  • Post trade transparency, and transaction reporting.
  • Record-keeping and crypto-asset white paper reporting.
  • Order book record-keeping report.
  • STOR (suspicious transaction order reporting).
  • Reserve of Assets report**.

Issuers of crypto-assets other than ARTs and EMTs

• White paper: issuers or offerors of crypto-assets other than ARTs and EMTs are not required to get authorisation but they must publish a white paper and notify their NCA before offering crypto-assets to EU customers.
• Right of withdrawal: retail clients have a 14-day window to revoke their agreement to buy crypto-assets without any fees or costs.
• Reporting requirements, not limited to but currently include: 
  • Post trade transparency, and transaction reporting. 
  • Record-keeping and crypto-asset white paper reporting. 
  • Order book record-keeping.
  • STOR.

When Does MiCA Come into Force?

MiCA has gradually become applicable with a phased approach since 30 June 

2024. It is a milestone in the development of the market: No other jurisdictions globally have yet taken such a comprehensive approach in regulating the crypto-assets space.

It is important to note that regardless of local rules in their home jurisdictions, even market participants from outside the EU must comply with MiCA if they want to compete in the EU.

Understanding European regulation is a complex undertaking, and we can help!

Book a call with the KYAX team today to better understand how MiCA will affect you, and what your company needs to implement to remain compliant. 

Schedule a call here.